Blockchain ‘could save banks billions’

Banks believe blockchain, the technology behind the Bitcoin currency, could save them billions in operating costs.

Citing a report by Credit Suisse, an article on BusinessInsider.com says banks could use blockchain to cut costs, better manage risk, achieve compliance more easily, and find new revenue streams.

Santander says it could cut costs by up to $20 billion a year by 2022 by using blockchain because of its potential to streamline processes and increase efficiency.

Goldman Sachs, and JPMorgan are among the other banks looking to blockchain to deliver billions in efficiencies.

What is blockchain anyway?

It’s sometimes said that new forms of finance pose a threat to traditional banks and the established financial services sector.

That’s unlikely, given the global power of the traditional financial sector, and the new technologies have yet to prove themselves.

However, so-called cryptocurrencies have gained quite wide acceptance, to the extent that examples such as bitcoin are now accepted by the established financial institutions.

Cryptocurrencies are vaguely like virtual currencies, such the Linden dollar in the game Second Life. Within the game they are used to trade virtual goods, such as a virtual house someone might have designed in the game, or a script that someone has written that perhaps makes the doors of the house open automatically when an avatar walks near it.

Linden dollars are initially acquired by buying them in exchange for real dollars from the Second Life game administrators.

Cryptocurrencies, we are led to believe, are a few orders of magnitude more secure than virtual currencies.

Linden dollars can actually be converted into real money through the Second Life game, but the currency hasn’t really caught on outside its own fan base.

Bitcoin, on the other hand, has been touted variously as the next global currency or the beginning of the end of all traditional currencies. While the end of the financial world has not arrived, nor does it even look imminent, bitcoin is nonetheless very popular.

The difference between bitcoins and Linden dollars is that while bitcoin is accepted for real goods in the real world, Linden dollars are only accepted in the game world of Second Life.

And that is the essential difference between cryptocurrencies, which are seen as secure enough and adaptable enough for real-world usage, and virtual currencies, which could be likened to Monopoly money — pretend money to be used inside a game.

Digital money, meanwhile, refers to real money that is held as bits and bytes — which more or less describes all the money in the real world, since almost all the money that all our banks hold is stored as data inside computers.

Having said all that, the US Treasury categorises bitcoin as a virtual currency. The UK does not recognise it. A few dozen other countries sort of recognise it but probably don’t want to because they don’t know what it is and what to make of it.

Moreover, bitcoin works on the basis of their being no basis, as in there is no central bank that issues the currency and, therefore, no institution can be held accountable if and when things go belly-up. This is a real problem in a world that is accustomed to central banks and national, or at least regional, currencies.

It is perhaps this decentralised nature of cryptocurrencies — in particular, bitcoin — that concerns governments and financial institutions.

But ignoring bitcoin has not made it go away. It is attracting intense interest because it is seen as having the most potential to grow in acceptance. Not only that, bitcoin is seen as highly secure because of the system within it is used, which might be puzzling to proponents and adherents of the central bank model.

Bitcoin was supposedly invented by Satoshi Nakamoto, though Craig Steven Wright also claims he invented it. It works on a supposedly peer-to-peer basis.

For example, a person at a computer in the UK could exchange bitcoins with another person in the US without an intermediary, just an internet connection between the two.

The closest thing these two example bitcoin traders have to a central bank to rely on to support their currency is a public distributed ledger called the block chain, which is a database that is not allocated to any particular CPUs — it sort of lives in the ether of the internet, supposedly, as strings of zeros and ones.

Maybe it could be thought of as an electronic record of a handshake between two people, or their computers, and that record is kept in a public ledger, somewhere on the internet.